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Replicating Strangles with Iron Condors

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

For traders with small accounts, the Buying Power Reduction of a strangle may be too costly. Rather than allocating all of your funds to a single trade, we can use Iron Condors to gain similar exposure with far less cost. Both strategies benefit from neutral price action, premium decay, and implied volatility contraction. However, with the added complexity of defining the risk, a question arises: How do we choose with leg to buy?

When converting strangles to iron condors, we can choose to set our wings based on delta and nominal width. With dynamic iron condors, there are different risk amounts on either side while static iron condors have the same risk on both sides. Regardless of the method used to set our wings, we see Iron Condor performance converge on Strangle performance when we widen the wings of the strategy.

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